The January 2016 deadline for Solvency II compliance is fast approaching, leaving many insurance firms, asset managers and third-party administrators with much to do as they tackle data management issues that are raised by the regulation and include huge data volumes, multiple data sources, new data types and complex data aggregation.
The data management challenges of Solvency II were discussed during a recent A-Team Group webinar. Andrew Delaney, chief content officer at A-Team, moderated the webinar and was joined by Darren Marsh, senior product manager at SIX Financial Information; Ee Wha Lim, head of product development at managed services provider OTCfin; and Susan Wright, regulatory and compliance specialist at the Investment Association.
If you missed the webinar, you can hear a full recording here.
Delaney set the scene for discussion, noting the aim of Solvency II to improve transparency of investments made by insurance companies and outlining the regulation’s requirements for insurance companies to source data from asset managers and third-party administrators, integrate new data classifications and put in place robust data governance policies and practices ahead of the January 2016 deadline.
Progress on compliance
To date, progress towards Solvency II compliance has been mixed, with most medium and large-sized insurance companies preparing for a dry run of the regulation this month or next, and also working towards the January deadline. Some smaller insurers are making slower progress.
Marsh explained: “Some insurance firms are well advanced in their preparations and will meet the reporting requirements of the dry runs, but others are off the pace. Tier one insurance firms are probably best prepared as they are keen to use internal models to meet Solvency II requirements as these are good for business.” Lim added: “We are seeing most activity around Solvency II’s Pillar I and Pillar II, which cover the core data requirements. Pillar I is about quantitative requirements and needs vast amounts of data. Pillar II includes the Own Risk and Solvency Assessment (Orsa) and data governance requirements. If good data is in place and correctly organised, fulfilment of the Pillar III reporting requirements should be a by-product of work done for Pillars I and II.”
Turning to the issue of sourcing data for Solvency II, Marsh noted that many tier one insurance firms maintain their own order book, while tier two and three firms often outsource asset data management. But, whatever the information sources, he said the two biggest challenges are the huge volumes of data that must be managed and the accepted timeframe of five to 10 days in which asset data must be collected and reported. On the latter, he noted: “Timeliness can be a problem for investment managers. They are happy to provide data to end users, but don’t want to make it public in the reporting timeframe insurers must achieve to be compliant. This means insurance firms must manage different timeframes as they pull all the data together for Solvency II reporting.”
In addition to these problems, insurance firms must back-fill gaps where asset data is not readily available from asset managers and source data such as Legal Entity Identifiers and CIC and NACE codes from data vendors. As Wright pointed out, the more asset managers an insurer works with, the larger and more complex the data management challenge.
Drilling down to data required to calculate the regulation’s Solvency Capital Requirement (CSR) and complete its Quantitative Reporting Templates (QRTs), Lim said: “Most firms are relying on market data providers for the new CIC and NACE data classification codes required for both the SCR and QRTs, but the data is not always complete and the granularity is not always consistent.” Marsh pointed out that the European Insurance and Occupational Pensions Authority (EIOPA) is still running a consultation process on Solvency II that could change CIC codes.
Considering the funds look-through element of the regulation, Marsh said: “The information required for funds look-through is not always readily available in the compliance timeframe. For example, it is difficult to get all the required data for private equity funds and funds of funds. There are also issues around levels of granularity and data consistency. Insurers need to decide whether they can source and use data directly form asset managers or whether they need to use third-party aggregators to meet the data requirements of Solvency II.”
Technology solutions for Solvency II compliance include enterprise data management tools for data storage and management, analytical tools for computation and stress testing, reporting tools and, importantly, an overlay to integrate the tools. Lim commented: “One supplier will not be enough. Insurers need to pick and choose solutions to meet their particular needs.” She also noted that EIOPA is developing a tool that will help insurers convert data to the XBRL format that is required for reporting.
One solution already supporting compliance is the tripartite template produced the Investment Association in the UK, Club Ampere in France and the BVI in Germany. Wright explained: “The template is a simple Excel spreadsheet that defines information and shows what needs to be included in security reporting. It is designed for reporting using the Solvency II standard model, not internal models, and allows insurers to make all necessary calculations. The template has no commercial benefit and we are sharing it with everyone who would like to use it. We have just finished the second version and will update it after EIOPA makes final changes to Solvency II requirements ahead of the summer break.”
Offering advice to data management practitioners working on Solvency II compliance, Lim concluded: “Focus on data management and best practice project management. As you embark on the data management journey, make sure there is collaboration between IT and business. As the journey continues, use an iterative process to continually improve your solution.”